Why do (some) economists support the minimum wage?

My colleague Dan Klein continues his pathbreaking work on the sociology of the economics profession. He asked petition signatories why they favor increasing the minimum wage. The results are striking, most of all for how far they stand outside traditional economic reasoning:

Alan Blinder: I would not put large weight on this, but I think that to some extent attitudes and mores matter. Regardless of Pareto efficiency, we do not allow indentured servitude or child labor. Similarly, a $7.25 minimum wage would state that society deems it wrong to pay less.

Peter Dorman: Since Tocqueville (at least) there is a well-established argument that greater equality of income and respect is associated with better democratic performance. This is a near-consensus position in political theory.

Arindrajit Dube: Increased income (and reduced inequality) has broad effects throughout society and polity; this includes (but is not limited to) increased self worth, increased ability to use added time to spend with kids, attend community college, etc., from an income effect.

Amitava Dutt: Reducing poverty, reducing inequality. Creating a culture where people realize that some basic needs of people should be satisfied.

Robert M. Feinberg: I’m not sure if this is exactly what is meant here, but I would see notions of fairness playing a role.

John R. Morris: Economic justice for low income people.

Jesse Rothstein: I believe that a great deal of bargaining happens within parameters that are determined, in part, by societal expectations. Government policy has some role in determining those expectations.

Paul Swaim: …I think it is important that adults working full time can earn enough to make a substantial contribution to supporting a decent living standard and take pride in their status as workers. Put differently, people playing by the rules should not feel like total losers (or be considered as such by their fellow citizens). The minimum wage can probably make a modest contribution to approaching this objective.

William Van Lear: Suggests a society committed to fairness and recognizes that power has a role in determining outcomes.

Mark Votruba: Vast disparities in wealth and income stability of democratic capitalism, as suggested by Alan Greenspan. I would add that our sense of community is undermined, which in turn undermines the social norms towards “appropriate” social behaviors, especially by those at the bottom.

Bernard Wasow: A low cost demonstration of concern for low wage workers that causes little damage. Elicits a buy-in by low wage workers to the polity

Henry W. Zaretsky: Improved living conditions for affected workers and their families. Less likely to become dependent on public programs such as welfare and Medicaid. More incentive to seek work. More stake in the system. More independence.

It is easy to read these and think "Ah, how narrow is neoclassical economics in contrast to these fine thoughts." My response is instead: "These people are making a mountain out of a molehill." Bernard Wasow is the guy who makes the most sense.

If you wish to understand the gap between market-oriented and more left-wing economists, this piece is an excellent place to start.

Is there any reaason at all to suppose that raising the minimum wage will do much to alter the distribution of wealth and income? Even if it has negligible employment effects, I really doubt that this is the best way to address concerns about income distribution.

When Tyler says they are making a mountain out of molehill, isn’t he really saying that he believes they are grossly overstating the benefits? And I’d add that they are understating the costs.

The results are striking, most of all for how far they stand outside traditional economic reasoning

I’d say that’s exactly why they are right. Human beings are not homo economus, and the comments here reflect that the minimum wage policies (and many other economic debates) have a much wider effect that simply the economic effects that they generate.

Bryan Caplin goes on endlessly about why don’t people listen to economists. He consistently fails to understand that there is a lot more to economic policy than economics and that people recognize this implicitly, even if he doesn’t.

Now having said that, it’s quite possible that one can overweigh the non-economic effects of economic policy, but to ignore them entirely is just as much a mistake.

I understand the sentiment, but this line of thinking still seems incredibly short-sighted. Sure, by raising the minimum wage we can make certain low income families better off RIGHT AWAY, a rise in unemployment notwithstanding. But whatever happened to the “bring tomorrow’s laggards above today’s mean” method?

I too thought that Wasow’s comment was the most interesting. To respond to Tom West, the problem with the fact that 98% of the reasoning for a minimum wage increase is non-economic, that means that as economists these commenters have no special standing. That is, we have no reason to respect their political theory ideas any more than their ideas on football or baby names. It makes the fact that “X economists support the increase” irrelevant.

Why doesn’t anyone ever make an optimal social insurance-type argument here? Minimum wage laws clearly raise wages at the bottom of the distribution (visibly in figures from papers by DFL and David Lee) while the efficiency (disemployment) costs seem small, at least for small changes in the minimum wage (Katz&Kruger; even Neumark and Wascher find small effects). An optimal transfer program trades the benefit of raising low wages against the costs of disemployment. The inital disemployment effect of introducing a small minimum wage is small (it’s second order) while the redistributive benefit is larger (it’s a first order increase in income). Hence, the optimal level of the minimum wage is NEVER zero.

Some of those comments by the economists seem quite divorced from reality. They seem to claim that the minimum wage is important to people working full time to support children. That simply doesn’t describe the vast majority of minimum wage earners. While the net benefits may be close to flat, it seems likely that much of the net benefits will go to children from middle-class families working part time (with low-skill people wanting to work full time seeing much of the negative side).

See for example this CBO study, which points out that the majority of people who earn the minimum wage, or even minimum wage to $7.25, come from households making twice the poverty line, and only about 10-20% from households below the poverty line.

If you agreed with the previous statement (in Q4), kindly tell us how you think
about those socio-political mechanisms (a few words, or, you are welcome to elaborate and to cite recommended sources):

So obviously they are non-economic – the question was designed to elicit non-economic motivations. If you look earlier in the survey, you find that 75% of respondents marked

“Inducing a transfer from employers to (generally less well off) workers, albeit with possible small disemployment effects.”

As one of their ECONOMIC motivations. The underlying unmentioned concept is potentially a non-economic ‘fairness’ preference, but it also could be a totally economic diminishing marginal utility argument. (Above some inflection point, the marginal utility of additional units of a given good is lower than the marginal utility of the lower units of that good. Your 1st hamburger is great, the 5th one doesn’t do much for you. If you generalize that money is a good, it too will have diminishing marginal utility – you can see that from the tendency for ‘willingness to accept’ to be greater than ‘willingness to pay’ in externality studies. (Yes, I know this is generally explained by the different budgetary sets. One of those budgetary sets – the fixed amount of time each person has to optimize his utility over, coupled with the perception that money represents productive time surrendered to others in exchange for the product of that time – is a nice place to hang a

Generalizing across people, we can say that someone with a lot of money will value the additional dollar lower than someone with a small amount. So redistribution is economic, even with a smallish dead-weight loss in overall monetary gains. (And, yes, I know it is an economics rule that utilities can’t be compared across people. It is a rule observed in the breach, not one that is ever obeyed.)

But it isn’t. The efficiency cost is way more than just the initial round of layoffs. The effects are far greater than the obvious reduction in staff. You must remember the other changes due to higher labor costs: less capital investment, lowered labor/capital optimal distribution freedom (e.g. forced reinvestment in capital instead of labor, potentially wasting resources), cutting or realigning of hours, inflationary pressures, lower dividends and capital gains to middle class workers, more duties and lower benefits for unskilled labor, etc etc.

What strikes me most is the number of economists interviewed that took the question “why do you favor x policy” and instead of answering as an economist would “because x policy tends to produce y result according to these models and y result is good” answered instead “y result is important!” — they did not make any effort to prove that the minimum wage is actually good for workers or for the poor. Some did not even seem to care – they instead thought that a positive externality of pretending to help workers was good for the morale of the country. Are they socialists? When will economists learn from their own mistakes??

Wasow gives a clearer version of my usual answer on the subject; that is, what damage it does cause is relatively small and difficult for the average citizen to see.

Of course, it does do damage though, and those that are buying voter approval are doing so at a great overall cost to society. (Voter approval as opposed to actual voters. Min wage earners are not a high voting demographic, but the blue-bloods feel better about themselves voting for the guy who cares enough to support the min wage.)

Where I live, labor law traditionally allows dismissal only with compensation. At-will contracts are now possible, but they lapse into contracts with protection after a certain time (the details are complicated). Unions often get even more job security written into collective bargains. Those bargains are declared binding by the government on companies in the same “branch of industry” as those that the union negotiated with. All of this is of course puffed as protection of poor people.

I know a middle-aged woman with next to no education who works in corporate cafeterias. Companies bound by very protective collective bargains outsource their cafeterias to a food service company, which then hires people like her through a temp agency. The temp workers’ collective bargain is more liberal, but in combination with the labor laws it still puts constraints on at-will contracts, and at some point every at-will contract lapses into a contract with protection.

Every time this is about to happen to this woman’s contract, she gets fired. She collects unemployment benefits for a few months, and as soon as she is eligible for an at-will contract again, she gets her job back. This has happened two or three times, I believe.

An alternative source of income for this person is informal employment as a janitor. As a janitor, of course, she is not periodically dismissed. Domestic services in my country are mostly provided on a black market. Everyone knows this, but it is glaringly obvious that doing something about it would not help the poor domestic servants, but rather cause people to clean their own houses, leaving the domestic servants unemployed. Actually enforcing regulations like minimum wage and dismissal protection would raise the cost of domestic services above what it’s worth to most people, and that would be the end of that.

But it’s hard to get into people’s heads that the same is happening outside of domestic services. If it weren’t for the rigidity of local labor law, the person I described, whom I know personally, would probably not have gotten dismissed from her cafeteria jobs. I know that my example is not about minimum wages per se, but I wanted to mention it because it is often so easy for middle class college educated people (like me) to fool themselves into thinking they know what is good for uneducated poor people, especially if they don’t actually know any such people.

Is it just me or do all the states that have a minimum wage floor set above the Federal standard have a higher cost of living rate? These states are mostly in the NE and the Pacific coast. Am I the only one that sees a strong correlation here? I’ll admit, during the industrial revolution, minimum wage and labor unions could be positive influences, but in today’s society only hinder the free market. In the spirit of our founding fathers, THE LESS GOVERNMENT THE BETTER!!

I’m sorry, but these people are either: ignorant, intellectually lazy, or intellectually dishonest. They really, REALLY want a minimum wage to be the solution, so they fit facts or ignore facts to make it so.

Those quotes are not to be believed! “…greater equality of income and respect is associated with better democratic performance.” Yup, sure worked great in the Soviet Union!

“Reducing poverty, reducing inequality.” How does giving 17-year-old suburban kids a raise while keeping inner city teens out of work accomplish either?

“…notions of fairness…” “Economic justice for low income people.” They completely ignore those thrown out of work or prevented from even getting a job. Is this fairness or justice for them?

“Suggests a society committed to fairness…” No, suggests a society committed to demogoguery and coercion.

“Elicits a buy-in by low wage workers to the polity.” What crap. How about electing politicians who don’t pander for votes with short-term solutions? That might increase buy-in to the ‘polity.’

Do they see what high minimum wages do in Europe? Do they care how many (or how few) minimum wage earners fit the demographic they want so badly to help? Do they understand how business inexorably finds more productive solutions?

Michael Dukakis and Daniel Mitchell stated a perfectly valid economic reason for raising the minimum wage. They advocated raising the minimum wage as a way of replacing illegal aliens with American workers. The economic logic of this argument was verified by none other than the hosts of MR. They detested the idea, but admitted that it made economic sense. To quote “I will give Dukakis and Mitchell this, their logic is impeccable†.

UK has been increased in the UK with great success. Unemployment has continued to fall despite several increases in the minimum wage. True the poorest don’t always benefit but there is some benefit for low paid workers

Persoanlly, I support a raise in minimum wage. I think it would help stimulate the economy for a couple reasons. It would increase the demand for the lower paying jobs and potentially reduce the unemployment rate. This would also increase the demand for certain supplies.

I don’t understand why many people are against raising the minimum wage. I am very much for raising the minimum wage. I could not agree more with Henry W. Zaretsky’s comment. Raising the minimum wage would definitely help improve living conditions for certain families. At what the minimum wage used to be at $6 and some change, that can not buy the things you need in order to live and raise a family. As expensive as things are getting today, that low of a minimum wage could not at all support a family. And also as Zaretsky said, I do agree that it would decrease the amount of people that are on such government programs as welfare and Medicaid. The minimum wage is so low, that families have to use these programs in order to pay for things because they don’t get paid enough money. Yes, I am in favor of raising the minimum wage. It definitely has more positive outcomes than negative outcomes.

The idea that raising the minimum wage will increase inflation is neither supported by logic or facts. It is an axiom of economics that prices are determined by markets, not exercises in cost accounting. Raising the minimum wage won’t change the market value of the goods and services produced using minimum wage labor. Why should it raise the prices of those goods? Minimum wage labor is only one small production factor. If minimum wage labor becomes more expensive, the prices of other production factors will fall. For example, rents, capital costs, and executive compensation will decline.

This is no hypothetical point. I know folks who own fast food restaurants. They make a large fraction of a million dollars each and every year. Raising the minimum wage (to $10/hour) might increase their costs by $200,000 per year. Will the price of burgers go up? Not one penny. Will they have to struggle to get by on $500K a year rather than $700K? Yes, but I think they can handle it. Times are tough and we all have to make sacrifices.

More broadly, corporate profits are at record levels (as a percent of GDP) and investment (in the US that is) is low. If labor costs rise, corporate profits will fall with few (if any) adverse consequences for the economy. Certainly, prices are not likely to increase. Rents can also decline to compensate for higher wages. Specifically, lower land rents will offset higher wages paid to farm workers (read some Ricardo).

Aside from the economic logic of a higher minimum wage, the facts demonstrate that the economic impact will be minimal. To be blunt, the minimum wage is so low in the United States today, that even a doubling will have little impact on production costs. The CBO found that 12 million workers were earning between $5.15 and $7.24 an hour in 2005. Giving them all a $10K raise would cost $120 billion per year. This is less than 1% of GDP and far less than the increase in profits in recent years.

It is unlikely that unions will respond to a higher minimum wage by demanding higher pay. There are several points here. First, unions strongly support higher minimum wages for political reasons. They aren’t likely to sabotage a higher minimum wage by making directly linked pay demands. Second, back when unions were much stronger, the minimum wage was a much higher percentage (46% in 1959) of average compensation. By contrast, the minimum wage was 21% of average compensation in 2005. This history shows that unions don’t have a problem with relatively high minimum wages.

Aside from providing a better life for low wage workers, raising the minimum wage (and reducing executive compensation) will reduce inequality in America. Of course, extreme inequality has many influential supporters.